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Accounting Boards Finalize Standards
for Health Care Entities

by Tony Andrade, Partner, and Marcy Boyd, Senior Manager, Health Care Group

The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) have approved a host of new reporting standards that affect health care entities across the spectrum—for-profit, not-for-profit, and governmental. The finalized rules impact a wide range of disclosures and other elements of your financial statements and require your organization to change its reporting accordingly. Let’s take a closer look at some of the key provisions.

Charity Care

According to Accounting Standards Update (ASU) No. 2010-23, all not-for-profit health care entities that report under FASB must measure the amount of charity care they provided based on direct and indirect costs, then disclose that information—as well as the method used to identify and estimate the amount of care. In addition, you must disclose any funds your organization received to offset or subsidize charity care.

These standards are effective for fiscal years beginning after December 15, 2010, and are applied retrospectively upon adoption.

Insurance Claims and Recoveries

The primary issue here is that health care organizations that report under FASB have significant exposure to loss from malpractice suits and other claims. Unlike other industries, which account for similar claims liabilities on a “gross” basis, health care organizations have operated on a “transfer of risk” premise.

ASU No. 2010-24 clarifies that insurance recoveries may not be netted against related claims liabilities. It adds that estimated gross claims liability should be determined without consideration to estimated insurance recoveries.

The effective dates for these standards are fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Retrospective application is permitted but not required.

Bad Debts

ASU No. 2011-07 reclassifies, in most cases, the provision for bad debts associated with patient service revenue from operating expenses to a deduction from patient service revenue. They also provide enhanced disclosure regarding how the organization considers collectibility; revenue, net of contractual allowances; and reconciliation of the activity in the allowance for doubtful accounts by major payer type.

The effective date here varies. For public companies, it’s fiscal years beginning after December 15, 2011; for nonpublic companies, it’s fiscal years beginning after December 15, 2012. The standards are applied retrospectively upon adoption.

Goodwill Impairment

When do you need to perform Step 2 of the goodwill impairment test? Under previous standards, if the carrying amount of a reporting unit is greater than the fair market value, then it’s appropriate to proceed to Step 2 to determine the amount of impairment.

ASU No. 2010-28 adds a second scenario in which you would have to proceed to Step 2 of the impairment test: If the carrying amount is zero or negative, you must also consider whether it’s more likely than not that goodwill impairment exists. If you believe it is indeed more likely than not, then you must complete Step 2.

The effective date for this standard varies. For public entities, it’s fiscal years, and interim periods within those years, beginning after December 15, 2010; for nonpublic entities, it’s fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may use the public-entity adoption date.

Business Combinations

ASU No. 2010-29 clarifies that if comparable financial statements are presented, then the pro forma information of a combined entity should be presented as though the business combination had occurred as of the beginning of the comparable (prior) year. Public entities, including public not-for-profit entities, will have additional disclosure requirements as a result.

The effective date is an acquisition date occurring within the first annual reporting period for the combined entity beginning on or after December 15, 2010.

Comprehensive Income

ASU No. 2011-05 offers two options for the presentation of comprehensive income: Entities can present net income and other comprehensive income in one continuous statement (statement of comprehensive income) or two separate consecutive statements (statements of income and comprehensive income). The standard eliminates the statement of equity presentation option. A portion of ASU 2011-05 was deferred with the issuance of ASU 2011-12 so the FASB can further consider presentation requirements for reclassifications out of comprehensive income.

The effective date for public entities is for fiscal years, and interim periods within those years, beginning after December 15, 2011, and for nonpublic entities for fiscal years ending after December 15, 2012.

Governmental Standards

There are two new GASB standards worth focusing on. Statement No. 61, which is designed to improve financial reporting for governmental entities, amends the requirements of GASB 14 and GASB 34. This standard changes the criteria for blending and includes only organizations for which elected officials are financially accountable—or that the government determines would be misleading to exclude. The effective date in this instance is fiscal years beginning after June 15, 2012.

Statement No. 62, which focuses on the codification of governmental accounting and financial reporting guidance, is similar to the FASB codification. It’s intended to enhance the usefulness of GASB codification by incorporating guidance that previously could be found only in certain pronouncements by the FASB and the American Institute of Certified Public Accountants (AICPA). Under the standard, enterprise funds, which used to be able to elect to apply FASB standards issued after November 30, 1989 (as long as they didn’t conflict with or contradict GASB pronouncements), will no longer be able to do so. In other words, they must now rely exclusively on GASB standards as the highest level of GAAP. The effective date is fiscal years beginning after December 15, 2011, applied on a retrospective basis.

A Revised Resource

With so much complex change going on in health care right now, you might benefit from a review of the AICPA’s Audit & Accounting Guide: Health Care Entities, updated this year for the first time since 1996.

In addition to important how-to advice for handling common health care–related audit and accounting issues, it provides nonauthoritative assistance for management of health care entities in the preparation of financial statements. Two new chapters on not-for-profit and governmental health care entities are especially useful.

Conclusion

Transition in the health care industry isn’t limited to the delivery of care. As you can see, standards for accounting and reporting continue to change and evolve.

Being prepared for change is critical. Take some time now to familiarize yourself with the new standards—and help ease your way into the new era of health care.

Tony Andrade provides audits and other assurance services, internal control reviews, benchmarking performance studies, and cash flow projections and forecasts to hospitals, medical groups, and other health care organizations.

Marcy Boyd provides operational efficiency and controls analyses and other auditing services to long-term care, medical groups, rural and community-based primary care facilities, hospitals, and other organizations.